Buffett’s 2013 Annual Letter to Shareholders
Warren Buffett does a fantastic job communicating the concept of staying humble in his annual letter to shareholders of his firm Berkshire Hathaway (BRK.A, BRK.B). Some may not believe that the Oracle of Omaha—arguably one of the best investors in history—has underperformed the market in 10 of the past 49 years, but it is true. In Nelson’s ‘The 13 Most Important Steps to Understand the Stock Market,’ he talks about the importance of setting expectations about the market and your portfolio appropriately. Having the right perspective could save you from a lot of portfolio churn as well as a lot of misplaced disappointment. Here’s the excerpt from Nelson’s ‘13 Steps’ (source):
You Will Be Wrong. Individual investors sometimes think that every idea should work out and immediately at that. Wrong. If you are a good investor, your winners will outperform your losers and you will make money. If you're an excellent investor, you'll still have a lot of losers, but you'll end up beating the market. The fact of the matter is that you will be wrong at times. You will make mistakes. Some of your investments will lose money. I remember one time I received an email from one of our members. He proceeded to tell me that he was so happy that we picked 8 winners, but he was extremely disappointed that 1 of our ideas did not work out. For some reason, he didn't understand that an 8 to 1 ratio is not only good, but unbelievably fantastic! I think it is partly because of this email that I have included 'You Will Be Wrong' in the top 13. Key takeaway: I don't care who you are. You will be wrong at times.
Below, please find the intro note of Buffett’s letter. We think his annual letter to shareholders is always a fantastic read for investors of all types.
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To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2013 was $34.2 billion. That gain was after our deducting $1.8 billion of charges – meaningless economically, as I will explain later – that arose from our purchase of the minority interests in Marmon and Iscar. After those charges, the per-share book value of both our Class A and Class B stock increased by 18.2%. Over the last 49 years (that is, since present management took over), book value has grown from $19 to $134,973, a rate of 19.7% compounded annually.
…we show our long-standing performance measurement: The yearly change in Berkshire’s per-share book value versus the market performance of the S&P 500. What counts, of course, is per-share intrinsic value. But that’s a subjective figure, and book value is useful as a rough tracking indicator. (An extended discussion of intrinsic value is included in our Owner-Related Business Principles on pages 103 - 108. Those principles have been included in our reports for 30 years, and we urge new and prospective shareholders to read them.)
<< Download report (to see pages 103-108)
As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.
Charlie Munger, Berkshire’s vice chairman and my partner, and I believe both Berkshire’s book value and intrinsic value will outperform the S&P in years when the market is down or moderately up. We expect to fall short, though, in years when the market is strong – as we did in 2013. We have underperformed in ten of our 49 years, with all but one of our shortfalls occurring when the S&P gain exceeded 15%.
Over the stock market cycle between yearends 2007 and 2013, we overperformed the S&P. Through full cycles in future years, we expect to do that again. If we fail to do so, we will not have earned our pay. After all, you could always own an index fund and be assured of S&P results.